Agency Relationship

and Theories

Notre Dame of Dadiangas University

Business College – Accountancy Program

Module Prepared by: Prof. Jon Leo J. Licayan, CPA

Agency, defined
• Civil Code of the Philippines:
• “Art. 1868. By the contract of agency a person binds himself to
render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter.
(1709a)”
Accountability

Employs To perform
PRINCIPAL AGENT SERVICE

Benefits
Agency Theory
• This theory is used to study problems of motivation and control
when a principal needs the help of an agent to carry out activities.

SELF-INTEREST SELF-INTEREST

Appoints Access

PRINCIPAL AGENT DETAILED

INFORMATION

Framework by BPP Learning Media. Approved by ACCA

Breakout Room Discussion
• In your respective breakout rooms, discuss why the shareholders
should be concerned about how the management is running their
company.
• From your shared observations:
1. Identify at least 2 issues that they must be concerned
about.

Breakout Room Rules:

1. Identify your facilitator, time-keeper, and documenter/s.
2. Time-limit for breakout room discussion is only 15 minutes. 5 minutes
brainstorming, 7 minutes discussion, and 3 minutes wrap-up.
3. All learners are encouraged to participate in the group discussion as the
presenters will be identified randomly.
 Agency Theory
• Conclusion: Shareholders incur Agency Costs for hiring
managers to run the company.

Cost of Bonding Residual Agency

Monitoring Costs Loss Costs

Costs to monitor Costs to provide Costs to the

the actions and incentives to shareholders of
performance of managers to act management
management in the best decisions that are
interest of the not in the best
company interest of the
shareholders
Transaction Cost Theory
• This theory is based on the idea that companies have to decide
which activities are needed to be performed “in house” and
which activities it can buy from external sources.

• Proponents of this theory argue that managers makes decision

based on a combination of bounded rationality and
opportunism.
• Bounded Rationality – Managers will tend to play safe
because they have limited understanding of alternatives.
• Opportunism – Managers makes decision based on their own
personal interests.
Transaction Cost Theory
Common Reasons for Vertical Integration:
• Reduce uncertainties about dealing with suppliers
• Avoid high purchase prices
• Manage Quality

Common Motivations of Managers to Support Vertical Integration:

• Amount that they will personally gain
• Probability of unethical behavior being discovered
• Extent to which actions are tolerated or encouraged
Stakeholder Theory
• Stakeholders are people, groups or organizations that can affect
or be affected by the actions or policies of an organization.

• Classification of Stakeholders as to Proximity:

Stakeholder Group Members
Internal Employees, Management, Board of Directors
Connected Shareholders, Customers, Suppliers, Creditors
External National Government, Local Government, Public, Pressure
Groups, Media, Competition, Trade Unions
Stakeholder Theory
Level of Interest
Low High

Weak

Ignore Keep Informed

Power

Keep Satisfied Key Players

Strong

Mendelow’s Power Interest Matrix

Stakeholder Theory
Problems with Stakeholder Theory
1. Managers might jeopardize the profitability of the company to fulfill
responsibilities to all stakeholders.
2. Stakeholders have divergent interests that may be difficult to
reconcile.

Points to be considered with Stakeholders

Instrumental View
• View stakeholders based on the economic benefit that the
company can derive from them.
Normative View
• The Company has moral obligations to all type of stakeholders
Reflection 1
Look into the Case of Deepwater Horizon Oil Spill and
identify whether the management of BP Company or
Transocean has accountabilities to their shareholders, as
their agents, and other stakeholders over the incidence.